Fitch is forecasting a negative outlook for India's telecommunications sector in 2013, largely due to weaker balance sheets since carriers have to reacquire 2G licenses amid the country's spectrum debacle and also face various business issues.

The Indian government's decision to change its spectrum-allocation policy, from a fixed-cost regime to an auction for all existing and future spectrum assets, will significantly raise the cost of licenses and spectrum. This will weaken the credit metrics of most telcos, if funded by debt, said the credit ratings firm in a report released Wednesday.

By next year, India's top four operators by revenue market share--Bharti Airtel, Vodafone India, Idea Cellular, and Reliance Communications--will all have to pay significant sums for a one-off charge to utilize excess spectrum above 4.4 megahertz (MHz), spectrum refarming, and future spectrum auctions.

"The [telecom] sector can afford at most only six profit-making operators in the long-term, and that average revenue per minute (ARPM)--currently the cheapest in the world at INR 0.41 to INR 0.43 (US$0.0075 to US$0.0079)--needs to rise for the industry to be sustainable."

Fitch also said the top four operators' EBITDA (earnings before interest, taxes, depreciation, and amortization) will not improve from the current 28 percent due to a combination of stiff competition, high initial 3G networks costs, and low ARPU (average revenue per user) for new subscribers.

Revenue in 2013 will rise only by the mid-single digits, in line with subscriber growth which is estimated to increase on average by 3 million to 5 million monthly. Voice will continue to be the primary revenue driver for operators in 2013, but data's contribution will double to between 7 percent and 9 percent, up from 4 percent and 5 percent this year, it noted.

High interest costs and capex required to meet growing data traffic and voice coverage will keep 2013 FCF (free cash flow) margins low at around 2 percent and 4 percent, which is not enough to make regulatory payments, it added.

Market players have had to address several issues due to directives meted down by the government. The Indian Supreme Court in February revoked all existing 122 2G licenses alloted since January 2008 over allegations of government fraud, and ordered the licenses be put back up for rebidding. In August, the government finalized the reserve price for 5MHz of pan-India 1800MHz bandwidth at INR 140 billion (US$2.5 billion), and INR 182 billion (US$3.3 billion) for 5MHz of 800MHz bandwidth.